Beyond Basic Compensation


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Beyond Basic Compensation

  1. 1. Beyond Basic CompensationUsing Bonuses, Profit Sharing and Employee Ownership to Motivate and Retain Workers on Your FarmProduced by California Institute for Rural Studies (CIRS) & National Center for Appropriate Technology (NCAT) © 2010 CIRS RME-D7402565 Table of Contents Benefits of Variable Pay Systems.....................................................................................................3 Challenges to Implementing Effective Variable Pay Systems ..............................................4 Variable Pay in Farming Operations ..............................................................................................5 Types of Variable Pay on California Farms ...................................................................................5 Formal Bonuses ..........................................................................................................................6 Informal Bonuses .......................................................................................................................8 Employee Recognition: Gifts & Rewards ....................................................................... 11 Profit Sharing ........................................................................................................................... 12 Employee Stock Ownership Plan (ESOP)- ...................................................................... 14 Practical Considerations for All Variable Pay Systems .......................................................... 16 Appendix I: Point-System Bonus Formula ..................................................................... 17 Appendix II: Bonus with Multipliers Formula ................................................................ 18 Resources ............................................................................................................................ 19 National Center for Appropriate Technology
  2. 2. A Publication of ATTRA – National Sustainable Agriculture Information Service • 1-800-346-9140 • www.attra.ncat.orgAbstractWith input costs and market prices continuing to addpressure to farming operations, the ability to maintainsatisfied, engaged, and skilled employees who are famil-iar with the farming operation is becoming increas-ingly important. Of the different strategies growers canemploy to increase employee satisfaction and retention,variable pay systems such as profit sharing, bonuses,and employee ownership appear to be some of the mostimportant.This handbook provides an overview of variable paystrategies used on California farms, including formal andinformal bonuses, profit sharing plans, and employeeownership plans. These strategies are highlighted in case-study examples. Also included are some practical consid- Acknowledgmentserations to keep in mind when implementing a variable We are sincerely grateful to the participating farmerspay system, ideas for engaging employees with bonuses, and farmworkers for generously sharing their storiesexamples of non-monetary rewards, formulas for cal- and insights that provide the basis for this handbook.culating bonuses, and resources for more information Additionally we would like to thank the research-about compensating and managing farm employees. ers, human resource managers and consultants who provided the background context for our case-studyAbout this Publication and CIRS— research. Thanks also to Judith Redmond, Sarah Coddington, Rex Dufour (NCAT), and Lisa KresgeCalifornia Institute for Rural Studies for the photographs used in this handbook.The information in this handbook is based on case-studyresearch conducted by the California Institute for Rural Funding for this project was provided by the Wash-Studies (CIRS). Interviews with farmers, farm managers ington State University Western Center for Riskand employees on five farms throughout California pro- Management Education and the USDA Coop-vide the basis for the handbook. erative State Research Education and Exten- sion Service (CSREES). We are grateful for theirThe California Institute for Rural Studies is a nonprofit support. This material is based upon work sup-social science research organization dedicated to promot- ported by USDA/CSREES under Award Numbering a rural California that is socially just, economically 2007-49200-03892.viable, and environmentally balanced. Founded in 1977,CIRS conducts applied research focused on promoting amore sustainable food system and improving conditions About ATTRA—National Sustainablefor agricultural workers. Agriculture Information ServiceFor more information about this handbook or the Cal- ATTR A offers hundreds of publications—many inifornia Institute for Rural Studies, or for information Spanish—on organic and sustainable agriculture topicsabout where to get technical assistance to help you make including marketing, crop production, processing, live-changes on your farm, please contact: stock, composting, ecological soil & pest management, farm energy, and agroforestry.The California Institute for Rural Studies221 G Street, Suite 204 All these publications can be downloaded free of chargeDavis, CA 95616 at Paper copies can be ordered byTel: 530-756-6555. Fax: 530-756-7429 calling 1-800-346-9140. The Spanish line is 1-800-411-E-mail: 3222. ATTRA is a project of the National Center Appropriate Technology (NCAT), see page 20.Page 2 ATTRA Beyond Basic Compensation
  3. 3. Beyond Basic CompensationUsing Bonuses, Profit Sharing, and Employee Ownership to Motivateand Retain Workers on Your FarmA Benefits of Variable skilled, satisfied and stable labor force is essential to the success of most farm operations. Nonetheless, many farms Pay Systemsexperience turn-over with related financial The benefits of properly implemented Ilosses due to the high cost of hiring and variable pay systems include:training new employees. With input costs t interestsand market prices continuing to add pressure • Increased employee satisfaction, me that theto farming operations, the ability to main- motivation, and retention companytain satisfied, engaged, and skilled employees • Increased productivity and cost-saving does well becausewho are familiar with the farming operation efficiencies if the companyis becoming increasingly important. • Cost savings through the promotion of does not do well,There are a number of mechanisms agri- desired behaviors (e.g., health and safety workers will notcultural employers can utilize to increase or IPM awareness) benefit. If theemployee satisfaction and retention, including • Engaged and motivated workers company doescompetitive wage structures and benefit pack- throughout the year better, we will getages. Of the different strategies growers can • Better cash flow management by more benefits.employ to increase employee satisfaction and spreading compensation payments out overretention, variable pay systems such as profit —California the year or by providing compensation aftersharing, bonuses, and employee ownership Farmworker harvest income is receivedappear to be some of the most important. • Improved interpersonal relationsIn fact, findings from a recent wage and ben- between growers & employees & amongefit survey conducted by the California Insti- employees.tute for Rural Studies identify profit shar- Additionally, variable pay systems representing and bonuses as the strongest predictor an important risk management strategy, pro-of employee retention. (See the Resources viding farmers with the ability to containsection on page 19 for the link to the online fixed labor costs in the face of lower thanreport.) Respondents implementing profit expected revenues and supplement wagessharing and bonuses reported five-year when revenues are higher. This is especiallyemployee retention rates of 49%, compared important for the many California specialtywith 34% among those not implementing crop growers, for whom labor costs representthose strategies. a large percentage of ATTRA Page 3
  4. 4. owners, which will encourage them to seek ways to maximize farm success. Challenges to Implementing Effective Variable Pay Systems When used thoughtfully, variable pay sys- tems provide numerous benefits to farm- ers and farmworkers alike. However, when not properly implemented, variable pay sys- tems can negatively impact farm operations by lowering worker morale and satisfaction. Variable pay systems are also an importants A lack of transparency regarding grower means of showing appreciation to employ- finances can result in mistrust when pay ees for their contributions to farm success. amounts are less than expected. At the same Variable pay systems can be an effective way time, perceptions of inequitable distribution ome for a farm owner to illustrate that they care to workers can result in conflicts and resent- variable pay about their employees’ well-being. They ment among workers, who often compare systems also promote and reward employees for tak- how much they have received.have the potential ing initiative, expanding their skill-set orto engage assuming additional responsibilities, all of The variability of farm income, difficulty in which can greatly contribute to the viability measuring some farm outputs, and lack ofemployees to see of farm operations. employee control over factors that affect farmthe farm from the success (e.g. weather and market prices),perspective of Additionally, variable pay systems can make it difficult to implement variable orowners, which will be important tools for retaining valuable incentive pay systems in farming operations. employees, motivating employees during The most common approach to variable payencourage them strenuous periods of the season, increasing is by paying for piece work. However, we doto seek ways to teamwork and encouraging internal super- not discuss piece rate systems because theymaximize farm vision among employees, who have a vested have been extensively discussed in other lit-success. interest in ensuring that co-workers are pro- erature. For more information on best prac- ductive and refrain from activities that may tices regarding piece work, see the University result in losses. Finally, some variable pay of California Agricultural Labor Manage- systems have the potential to engage employ- ment website listed in the Resources section ees to see the farm from the perspective of on page 19. According to Farmworkers… According to case study research conducted not implemented properly, including mis- by the California Institute for Rural Studies trust of growers claiming bad years, con- (See Resources section, page 19), partici- flicts among employees based on per- pating farmworkers cited the importance of ceptions of inequitable distribution and variable pay with respect to job satisfaction, reduced morale associated with lower than productivity and retention. Site visits con- expected amounts. firmed that worker satisfaction and moti- vation were notably higher on farms with When asked about these issues, the major- more organized, transparent and generous ity of growers admitted to using very infor- variable pay plans. mal approaches to calculating profit sharing and bonuses, and expressed high levels of However, farmworkers cited negative interest in learning about more formal ways impacts when variable pay systems were of doing so.Page 4 ATTRA Beyond Basic Compensation
  5. 5. Variable Pay inFarming OperationsIn spite of the difficulties with implementa-tion, the use of variable pay systems is fairlywidespread, as reported by 43% of respon-dents to the Farm Employers Labor Service(FELS) wage and benefit survey. The pur-pose of this manual is 1) to provide farm-ers with an overview of a few of the differ-ent types of variable pay systems that canbe effective tools for managing farm laborand 2) to highlight factors for considerationwhen implementing these systems.For farmers not currently implementingthese systems, we hope this information willhelp you assess whether these strategies are Types of Variable Pay onappropriate for your farm operations. California FarmsFor farmers currently implementing vari- The following pages offer an overview ofable pay systems, we hope you will gain the different types of variable pay systems: Tsome insight into ways to more effectively formal bonuses, informal bonuses, profitimplement these systems and enhance your he tax code sharing, and employee stock ownership encouragesfarm operations. plans (ESOPs). us to giveOne final caveat: while variable pay systems back to employees asmay work well on some farms, it is impor- Bonusestant to examine your specific operation to much as possible to Bonuses are variable compensation beyondsee if variable pay is an appropriate strategy regular wages that is paid directly to an lower our tax burden.for your farm. employee. Bonuses can be used to reward We want the peopleThis manual covers three types of variable individual or group behavior or performance. who are making thepay systems: bonuses, profit sharing and There are two main types of bonuses: for- profit to benefit.employee stock ownership plans (ESOPs). mal bonuses, and informal, or spot bonuses. We want people to beEach section provides an overview of a vari- Formal bonus systems are based on specific well paid. I think it is aable pay strategy including the key reasons criteria outlined ahead of time, while infor- mal bonuses are random or unexpected. very strong incentive.for using the strategy and key factors to keepin mind when implementing the approach. The main factors that differentiate these two —Central Coast types of bonuses are timing, degree of struc- FarmerCase study data collected from five Califor- ture, and employee expectation.nia farms accompanies eachsection. The case studies pro-vide a few examples of ways Bonus compensation can be calculated based onsome farmers are using variable a number of factors including the following:pay to maximize farm success. • Fixed dollar amounts per hour, day, quarter, or yearWhile not comprehensive ofall variable pay options, these • Percentage of employee income or farm profitsexamples are intended to illus- • Dollar amount equivalent to a week or month salarytrate how some farmers areaddressing their labor needs • Tiered approaches based on percentage of sales orthrough variable pay systems. different years of service • Multi-factor approaches (see Appendices) ATTRA Page 5
  6. 6. I am interested in the finances of the company and what the owner says because it is important to know about the farm stand and the farmers’ mar- ket workers to clarify how the company works and how it is doing. It is impor- tant to me that I can contribute ideas and report about what is going on in the fields and discuss it with the supervisor because it helps the company and if it is something that affects the company in a bad way, then it is bad for us as well. — California Farmworker • Health and safety—Remaining accident- Formal Bonuses free; participating in a safety team or safety training; completing safety knowledge test A formal bonus is a consistent and antici- • Skill development—Completing ESL pated bonus given to recognize or reward program or tractor driving-skills test employees for individual or farm perfor-W mance. Formal bonuses are often structured, • Performance—Reducing equipment e pay based upon a specific goal, and issued at a set costs; increasing production mini- time per year. (See Appendices for formulasmum wage and use to use in implementing formal bonuses.) Factors to keep in mind withthe bonus program formal bonuses What are the goals of a • An annual bonus can become anto supplement that.That enables us to formal bonus? expected component of overall compensa-protect ourselves in • Reward employees for their roles in the tion and lose its effectiveness as an incen- farm’s success tive.a bad year, sinceonce you raise the • Recognize individual performance • As bonuses continue to increase for long term or highly skilled employees, theminimum wage you • Motivate specific behaviors bonus pool continues to increase. Placingcan’t go back. It gives a ceiling cap on bonuses reduces their effec-us more flexibility. Examples of formal bonuses tiveness. —Central Valley • Retention—Retaining valuable employ- • Fluctuations in bonus amounts can Farmer ees; rewarding years of service; celebrating cause dissatisfaction among employees, an employment anniversary especially when bonuses are lower than • Seasonal—Season’s end bonus for com- previous years. pleting the season or harvest; return bonus • Perceived inequities can result in con- given at the beginning of the next season flict among employees and reduce morale. • Mid-season motivator—Given during • Bonuses for seasonal employees can the season to boost morale and motivate be particularly important in encourag- employees through the harvest ing trained employees to continue returning • Annual—Birthday, holiday every year until a full time position becomes available.Page 6 ATTRA Beyond Basic Compensation
  7. 7. On-Farm Example #1: Formal Bonuses The bonuses are really to thank our crew and to let them know that we have noticed and that we appreciate how hard they work. It is a great way for an owner to make the employees feel like they are getting a share. And if it is a good year, then they are going to get a bigger share than if it’s not a good year. —Capay Valley Farmer Farm location: Capay Valley Farm type: Diversified fruit & vegetable crops, flowers, livestock Number of employees: 50-60 Variable pay strategies: Three formal cash bonuses per year Mid-Season Motivator Bonuses: They pay two peak season bonuses to all employees. Goal: To show appreciation and reward employees for how hard they have worked and to motivate employees to continue working hard through the difficult time in the season. Criteria: The factors taken into consideration include longevity at the farm, employee skill level, and a subjective assessment of individual performance, effort, and attitude. Amount paid: For each mid-season bonus, they give a minimum of $25 up to $1,000 to people in key leadership positions. Distribution: Paid as a cash bonus in July and another in August. End-of-Season Cash Bonus: They pay an annual end-of-season bonus to all employees. Goal: To recognize and reward employees for their contribution to farm success. Criteria: Same as mid-season bonus (above). “The amount of bonus is a reflection about how we feel that the person has contributed. It is subjec- tive. We look at what we did the last time and we decide if it will be a little bigger or maybe we can’t make it bigger this time. The bonus could go lower if the employee did not perform well.” Amount paid: The year-end bonuses range from $200 to $6,000. Distribution: Each November they hold an end-of-season meeting to thank employees, review the year, and discuss any problems that may have affected the bonus. “We have a meeting with the whole crew. We tell them, ‘Thank you and this is what went really well this year. We saw you guys working really hard.’ Then we divide up the envelopes with the bonuses and each partner distributes the envelopes to show that we know each person’s name and who they are. In the years that we have had problems, we have talked about it and explained, ‘This is why the bonuses are going to be a bit smaller this year.’” ATTRA Page 7
  8. 8. outstanding behavior toward the safety of others; exemplary display of cooperation or team- work; exceptional display of leadership or performance • Employee ideas/sugges- tions—Efficiency improve- ments; problem-solving ideas • Special circumstances— Informal Bonuses Meeting a harvest crunch such (Spot Bonuses) as a CSA or farmers’ market deadline; work- ing late/early for frost control; preventing an An informal bonus is a casual or unexpected accident; helping someone in need cash bonus given directly to an employee. • Special occasion—Marriage; birth of aW Informal bonuses are the most personalized child; community service award because they illustrate that an employer rec- e try ognizes and values individual employees and com- appreciates employee efforts. They are most Factors to keep in mind withmunicating to people effective when the reward is given immedi- informal bonusesthat positive ately following the event or behavior being • Informal bonuses can be difficult to recognized. track since they are often given on the spurperformance in thebusiness is to their of the moment. Developing a structured What are the goals of an approach with a yearly budgeted amountbenefit as well for distribution can increase bonus program informal bonus?as to ours. effectiveness. —Central Valley • Show appreciation for employee Farmer • Recognize individual employees • It is important to standardize awards so that the awards are consistent for the same • Reward specific behaviors that exceed behavior. Each employee receives the same normal job expectations award for the same event or behavior. • Informal bonuses have the potential to Examples of informal bonuses cause dissatisfaction or decreased employee • Exceptional behavior/performance—Rec- morale due to perceived inequities among ognition of crop issue, pest problem or disease; employees. Creative Approaches for Engaging Employees with Bonuses • Develop a randomized drawing for bonuses prizes to motivate and engage employees. • Allow other employees to nominate co-workers for recognition to encourage teamwork and cooperation. • Develop a point system structure through which employees can collect points from spot bonuses and then redeem points for a cash bonus on a quarterly basis. • Allow employees to select bonus from a menu of options such as gift certificates, bonus gifts, and cash. • Engage employees in developing the bonus system. Have them help identify performance criteria and behaviors that improve farm performance or save money.Page 8 ATTRA Beyond Basic Compensation
  9. 9. On-Farm Example #2: Combination System Our fundamental core value is that you ought to share the success with those who helped bring it to you. It has a way of return- ing to you. The more successful you are, the more ability you have to share that success. —Sacramento Valley Farmer Farm location: Sacramento Valley Farm type: Field crops Number of employees: 180 Variable pay strategies: Formal cash bonus, informal cash bonuses, and a deferred profit-sharing plan Informal (Spot) Bonus: Occasionally the farm gives out an informal cash bonus. For example, they gave one employee a $100 spot bonus for preventing an accident between a distribution truck and a train. Formal Bonus: They pay an annual cash bonus to all employees. Goal: To reward employees for their individual performance. Criteria: Individual performance reviews and farm performance. Amount paid: The cash bonus runs around 2 - 12% of base pay. They determine the cash bonus by comparing the annual crop performance to their average yield per acre, calculated over time, and factor in each employee’s individual performance evaluation. Individuals with lower performance evaluations receive less cash bonus than they would otherwise. Employees employed for less than one year receive a pro-rated bonus. (See appendix for ideas for calculating bonuses). Distribution: Paid as a cash bonus in January or mid-February. “We do a year-end review on an individual and aggregate basis. At the annual meeting we present how we did as a company; we review the numbers with them, show them the yield and how we did.” Deferred profit sharing: The farm contributes to a profit-sharing plan for all employees. Goal: To help employees save for retirement and to reward employee contribution to farm success. Criteria: Farm profits. Amount paid: The farm contributes approximately 5% of wages depending upon pre-tax farm profits. In higher profit years they increase the amount shared with employees. Distribution: The farm contributes a percentage of profits to a profit sharing plan through a third party administrator who invests shares for employees. Employees may collect shares or roll shares into a separate retirement account when leaving the ATTRA Page 9
  10. 10. On-Farm Example #3: Formal & Informal Bonuses We have a lot of longevity in our work- force. We have a lot of people who have worked for us for 25 years. People have a tendency to stay with us and that is the proof in the pudding for us. —Central Valley Farmer Farm location: Central Valley Farm type: Diversified vegetable crops Number of employees: 60 - 100 Variable pay strategies: Informal & formal bonuses Informal (Spot) Bonus: This farm buys hamburgers or pizza for employees on days that they have to work overtime in order to make a harvest deadline. Birthday Bonus: They provide a birthday bonus for each employee. The employer explains, “I used to buy everyone a cake for their birthday, but now I give everyone a gift card to the grocery store for food only for their birthday.” Annual Bonus: They pay an annual year-end cash bonus to all permanent employees with 12 months of uninterrupted employment. Goal: To recognize and reward employees for leadership behaviors, high performance, attention to quality, proper care of equipment, and level of cooperation. Criteria: Employee skill level, comparison to the previous year’s bonus amount, and a subjective assessment of employee performance, ability to work independently, and level of cooperation. Amount paid: They give a minimum of $300 up to $4,000 to people in key leadership positions. Each November they evaluate the profit and loss report, compare them to the previous years, esti- mate upcoming capital expenses, and determine a target amount for the bonuses for that year. Distribution: Bonus checks are distributed at annual Christmas party. Seasonal Employee Bonus: At the annual Christmas party, they give a small bonus to employees who have not been employed for a full year. As the employer explains, “Everybody gets at least $50 regard- less of whether they have only worked here a week. Everybody deserves to have a Christmas dinner and that’s about all that $50 will buy anyways.” Notes from the Farmer... “Our bonus system is very top-loaded for people in key leadership positions. We are trying to reward people that are doing a superlative job, that are leading and are setting an example for other people. We reward the people who, if we lost them, might take us years to replace. Those people are in the top echelon in the bonus system. It becomes a subtle communication tool.” “The main challenge is when you have an off year and you can’t be as generous as you have in the past. It is very challenging to face your crew and give them a check that is significantly less than they are expecting... But, at the same time, it is our responsibility as the owners of the business to make sure that the business stays up and running and is sustainable.”Page 10 ATTRA Beyond Basic Compensation
  11. 11. Employee Recognition: Gifts & Rewards Non-monetary gifts are another approach for providing bonus com- pensation to your employees. Non- monetary gifts have several advan- tages. For example, giving a gift can be more memorable to employees than cash especially if the gift is spe- cifically tailored to the employee. Additionally, when farm finances are tight, a special gift can have more impact than cash. Examples • Occasional food bags (provide a selection of staples such as tortillas, rice, beans, meat, fruit, etc.) • International phone cards • Pizza night (during busy times that keep employees working late) • Grocery gift cards (choose stores that are nearby or accessible without a car) • Hats, bandanas, or other popular clothing items used on the farm • Special gifts (TV, iPod, DVD player, etc.) Things to Keep in Mind • Non-monetary gifts/ rewards can help employees better differentiate a bonus from regular anticipated compensation. • Make sure the gift or reward is desired. Lower-income employees may prefer cash and migratory workers may not appreciate large items. • Giving a choice of prizes can help engage employees in the reward system and give them a sense of empowerment to make their own decisions about what they receive. • Some gift bonuses are sub- ject to taxes.Be sure to consult an accountant or the IRS Farmer’s Tax Guide (see Resources, page 19) regarding tax implications for the farm or farm ATTRA Page 11
  12. 12. Profit Sharing • Gain sharing plans share a percentage of profits based on revenue gained from Profit sharing is a system improvements in productivity over a desig- by which a percentage of nated baseline level. profits are shared with • Cost savings plans share a percentage of employees for their con- revenue saved due to increased cost-saving tribution to farm success. efficiencies or lower operating costs compa- Based upon the assump- rable to a baseline year. tion that employee per- formance contributes to farm performance, profit Factors to keep in mind with sharing plans aim to profit sharing encourage employees to • Profit sharing can help draw the con- work toward increasing nection between farm profits and employee farm profits. Employees performance. receive a share of profits using a pre-determined • Profit sharing can address some of the formula based upon a conflict associated with perceived dispari- percentage of income, ties because it rewards employees based on a an equal distribution of pre-determined and known formula rather shares among employ- than subjective evaluation. ees, or an approach that incorporates multiple factors. • Deferred profit sharing plans provide tax benefits to employees for retirement sav- There are two main approaches to profit ings. However, because they are not paid out sharing: 1) a cash-based profit sharing plan immediately, deferred plans are less effective distributes a percentage of profits directly to at connecting farm profits with individual an employee in a cash bonus on an annual, behavior.I semi-annual, or quarterly basis and 2) a am very • Profit sharing may be most effective deferred profit sharing plan contributes a interested in percentage of profits to a pooled or individ- if combined with a more immediate cash how the ual retirement plan for employees. bonus spends • Clearly communicating the link be-money and how What are the goals of tween employee behaviors, farm profits,much money they profit sharing? and the profit sharing bonus improves planhave because how effectiveness. • Motivate employees to pay attention tothe company does factors and engage in behaviors that will • Profit sharing plans that defer moneyaffects everybody. increase profits for retirement may not be attractive to —California all employees because they may not believe • Increase employee commitment to and Farmworker they will ever receive the money, they may be sense of investment in farm too young to appreciate the need to save for • Help employees save for retirement retirement, or employees may have a greater immediate need for the money. Profit-sharing variations • Employee Retirement Income Security • Standard profit sharing plans share a Act (ERISA) laws require that all employees percentage of profits based upon positive are eligible to participate in the profit shar- organizational profits. ing plan.Page 12 ATTRA Beyond Basic Compensation
  13. 13. On-Farm Example #4: Formal Bonus and Profit Sharing The bonus modifies behavior because it is tied to the evaluation. The profit sharing is to foster good cooperation – so if everybody cooperates then we are going to make a decent profit. —Central Coast Farmer Farm location: Central Coast Farm type: Nursery crops Number of employees: 60 - 105 Variable pay strategies: Formal bonus & deferred profit sharing plan Formal Bonus: They pay an annual bonus to all employees. Goal: To recognize individual employee performance. Criteria: A combination of individual employee performance evaluation scores and personnel/pay- roll records (tardiness, not calling in, time card errors, etc.). See appendices for example formulas for calculating bonuses. Amount paid: The maximum bonus for field workers is $500 or the equivalent of one week’s pay. For foremen, the bonus can be up to $5,000, or three weeks’ pay. For sales staff, the maximum pay is 20 - 25% of their gross earnings. Sales staff receives a bonus based on a percentage of net sales because their activities have a direct connection to sales. Distribution: The bonus is paid as an additional check in December. Each year they calculate the total cost of the bonuses and evaluate whether they have enough money to cover the additional bonus compensation. If not, they don’t pay a bonus that year. They hold meetings as soon as they think that they cannot pay the bonus to explain the financial situation to employees. Deferred Profit Sharing Plan: The farm contributes to a profit sharing plan for all employees. Goal: To encourage cooperation among employees and to help employees save for retirement. Criteria: Farm profits. Amount paid: 5 – 6% of gross employee earnings for each employee. Distribution: The farm contributes a percentage of profits through a third party administrator who allocates and invests the contributions for the employees until they leave the company. Each Feb- ruary, the company board of directors holds a meeting to evaluate the previous year’s profits and determine if they have enough profits to contribute a minimum of 5% to the profit sharing plan. If not, they don’t contribute to the profit sharing plan. Notes from the Farmer... “The primary motivation of the bonus is to encourage cooperation; to have people recognize that their col- lective efforts are very important to our annual success. By offering a bonus we can encourage that level of cooperation. It is evidence to the employee that the company is very interested in being successful.” ATTRA Page 13
  14. 14. Employee Stock • Leveraged ESOP – In a leveraged ESOP, the business or ESOP trust borrows money Ownership Plan from a lender and uses the money for capital (ESOP) investments or to buy out a retiring owner. The ESOP trust pays back the loan with A small but growing num- annual tax-deductible contributions made ber of farmers are participat- by the company to the trust. Employees ing in employee stock own- receive cash or shares when they leave the ership plans. ESOPs are an company. innovative way of achieving a shared sense of ownership Factors to keep in mind with ESOPs for the farm and provide a vehicle for potential farm • ESOPs are a powerful tool for promot- succession. ing employee commitment to the farm and dedication to farm success. Under an employee stock ow nersh ip pla n, e ach • An ESOP business can be 100% or only employee is an owner with partially owned by employees. shares in the company. Sim- • ESOPs provide special tax benefits to ilar to profit sharing plans, both employees and business owners. ESOPs contribute cash or shares to a com- pany ESOP trust fund. Within this ESOP • A leveraged ESOP provides an excellent trust, each employee receives shares based vehicle for farm succession with significant on a pre-determined formula. After a periodO tax benefits. ther com- of typically three to six years, employees are panies do eligible to cash out 10t0% of their shares • ESOPs are most effective when com- not offer upon departure from the farm. (See the bined with an open-book management Resources section, page 19, for more infor- approach that engages employees and edu-this benefit and it is a mation regarding ESOPs). cates them about farm finances.good thing to bepartial owner. The • The set-up and ongoing management of What are the goals of ESOPs? an ESOP require the assistance of a finan-longer that I stay • Increase employee commitment to cial and legal consultant. ESOP set-up andhere, the more my ongoing management expenses can be rela- the farmshare of the company tively high.will be worth. • Motivate employees to see themselves —California as co-owners and engage in behaviors that • An ESOP requires an annual stock val- Farmworker contribute to farm success uation to determine the price of the shares. • Help employees save for retirement • The business must be prepared to buy back shares when an employee leaves the • Provide a mechanism for the farm’s suc- farm. cession • ESOPs don’t allow for distribution ESOP variations formulas that favor some workers. This reduces perceptions of inequity, however • Non-leveraged ESOP – With a non-lev- ESOPs alone are not as effective at reward- eraged ESOP, the company simply contrib- ing specific behaviors or individual perfor- utes shares and/or cash to the ESOP trust mance because everyone receives the same and employees receive cash or shares when amount regardless of their perceived relative they leave the company. “value” to the farm in terms of level of skill, responsibility, or performance evaluation.Page 14 ATTRA Beyond Basic Compensation
  15. 15. On-Farm Example #5: Employee Stock Ownership Plans and Bonuses I realized that it was a good idea to try to institutionalize things and de-personalize the farm’s dependence on one person. It is fairness. We are all in this together. It is sort of appropriate that employees own a certain percentage of the business. —Central Coast Farmer Farm location: Central Coast Farm type: Diversified vegetable crops Being a partial owner makes me want to try Number of employees: 30-50 harder so the company can do better. — California Farmworker Variable pay strategies: Informal bonuses, profit sharing cash bonus, & an employee stock owner- ship plan (ESOP) Informal (spot) bonus: Periodically this farm provides an informal bonus when they have a big bulge in production and need to get through a tough spot in harvesting. Profit sharing cash bonus: Each manager receives a cash bonus based on farm profits as a part of their overall compensation. The bonus is an incentive payment for farm managers because they have more direct ability to affect the outcome of farm profits through their decision making. ESOP: Currently employees own 8% of the farm through the ESOP. Goal: To provide an incentive for employees, to engage employees to think like co-owners, and to provide a mechanism for farm succession. Criteria: Farm profits and desire to build the percentage of employee ownership to a significant enough level to serve as an incentive for employees. Amount paid: Annually, the primary farm owner contributes a combination of stock and cash to the ESOP trust. The amount depends on farm profits. “In a bad year I may only contribute 1,000 shares of stock and no cash and in a good year I have contributed 2,000 shares and $30,000 in cash.” Distribution: Each employee is allocated a percentage of shares based on their proportional share of the payroll; the shares are held in the trust until they leave the farm. Employees are entitled to the full amount of their shares after a period of seven-years. Notes from the Farmer… “You have to meet a certain size of company and you have to have the temperament for ESOPs – being interested in the concept of democratic management, shared ownership, and employee education. You have to really believe in this kind of thing for it to be worthwhile. With a more direct profit sharing where people actually get a check as a bonus, then you would see the results right away. But the idea with an ESOP is that they get ownership and that is abstract. You have to take a long-term view and you can’t expect immediate results. It takes five years or so for an ESOP to sink in…” ATTRA Page 15
  16. 16. Practical Considerations for All Variable Pay Systems farm performance. This can be particularly important in low profit years. • Do not make mid-season changes to the criteria or methods for calculating variable pay. Review the variable pay system annu- ally and make any necessary adjustments between production seasons. • Consult tax accountant about potential tax benefits for spending more money in variable pay to employees. Also, it is impor- tant to check tax implications for employee gifts and bonuses and inform employees about tax liabilities. • Try to avoid variable pay systems that encourage employee competition rather than cooperation. • Variable pay should only be used as a sup- plement to fair wages, not a replacement. • Beware of providing safety bonuses for remaining accident-free. This can incentiv- • Identify key factors for farm success that ize employees to avoid reporting accidents in employees can control. These include specific order to receive the bonus. However, if done behaviors that contribute to increased farm well, this type of bonus has the potential to profits and areas for savings or increased effi- save employers’ money by reducing workers ciency. Tie variable pay to these factors and compensation costs. clearly communicate them to employees. • Try to incorporate objective criteria • Communicate in advance the specific such as a systematic evaluation process that behaviors that are related to desired out- involves multiple supervisors/mangers, per- comes. Let employees know how bonuses formance goals, or skill level attainment, to are calculated, method of payment, and tim- reduce the level of subjectivity and potential ing of payments. Show an example of how perception of favoritism. the bonus or profit sharing is calculated so employees can see the factors involved and • Variable pay is only one component of a have clear expectations. well-designed compensation package. For more information about additional (mon- • Variable pay systems work best when etary and non-monetary) ways to increase combined with a high degree of transpar- employee satisfaction through improving ency about farm finances including annual employee relations, consult the resources production targets, sales goals and actual appendix. Understand what behaviors you are trying to generate or reinforce, and reward those. It is pretty easy to reward the wrong things and then scratch your head and say, “Why are we getting these weird behaviors?” Make sure what you are rewarding is what you want to have happen. —Sacramento Valley Farm ManagerPage 16 ATTRA Beyond Basic Compensation
  17. 17. Appendix I: Point-System Bonus FormulaFollow the steps below to develop a point-based bonus system to use with a pre-determined amount ofmoney available for the bonus pool. Calculate potential scenarios and make adjustments before implement-ing. After the point categories are set, describe the process to employees at the beginning of the season.Set Up a Point-Based Bonus System Using these Steps: Step 1. Identify point categories and attach a maximum point value to each category based on relative importance to farm operations. Step 2. Determine maximum points. Step 3. Total each employee’s points individually, and then total all employees’ points together. Adjust points as necessary to provide appropriate weight to each category. (Do not adjust mid-season.) Step 4. Determine employee points as a percentage of total points. Step 5. Multiply employee percentage by total bonus pool.Example of a Point-Based SystemStep 1. Identify point categories Step 2. Maximum point value = 220 • Key employee levels. Set points for each Highly skilled (150) + 20-year employee (40) skill level. + 6 spot bonuses (30) = 220 Highly skilled = 150 Semi-skilled = 100 Step 3. Total the employee points individually Entry level = 50 and then add them together to get total points for all employees. • Tenure. Set number of points per year worked. Total points: Employee A (185) + Employee B (145) 2 points per year worked + Employee C (84) = 414 Maximum points = 40 (for 20-year employee) Step 4. Calculate individual employee points as • Spot bonuses for skill development, exceptional a percentage of total points for all employees. behavior, etc. Set number of points. Employee A: 185/414 = 0.45 x 100 = 45% 5 points each Employee B: 145/414 = 0.35 x 100 = 35% Maximum points = 30 Employee C : 84/414 = 0.20 x 100 = 20% • Subtract points for employee file demerits for Step 5. Bonus pool = $4,000 tardiness, discipline issues, no shows. Employee A: 0.45 x $4,000 = $1,800 -5 points each Employee B: 0.35 x $4,000 = $1,400 Maximum points = -30 Employee C: 0.20 x $4,000 = $800Employee Employee A Employee B Employee CSkill level Highly skilled Semi-skilled Entry level (150 points) (100 points) (50 points)Tenure Employed for 10 years Employed for 15 years Employed for 2 years (+ 20 Points) (+ 30 Points) (+ 4 Points)Spot Bonuses 3 spot bonuses 4 spot bonuses 6 spot bonuses @ 5 points each @ 5 points each @ 5 points each (+ 15 points) (+ 20 points) (+ 30 pointsDemerits no demerits 1 demerit @ 5 points no demerits (- 0 points) (- 5 points) (- 0 points)Total Points 185 145 ATTRA Page 17
  18. 18. Appendix II: Multi-Factor Bonus with Multipliers FormulaFollow the steps below to develop a multi-factor bonus system. Determine standardized scores andcalculate potential scenarios. If necessary, make adjustments before implementing. After the points are set,describe the process to employees at the beginning of the season. This formula is not based on apre-determined amount of money in a bonus pool. Calculate maximum bonus for all employees todetermine the amount of money necessary to pay the bonus.Set Up a Multi-Factor Bonus System Using these StepsStep 1. Decide on performance evaluation criteria Step 6. Review employee file and payroll(attitude, skill development, etc.) records for demerits (tardiness, not calling in,Step 2. Create standardized evaluation form timecard errors)Step 3. Develop scoring structure Step 7. Determine the composite score for(each performance evaluation = maximum of 5; each employee based on performanceeach demerit = 0.05 late, 0.25 no call, etc.) evaluations minus demeritsStep 4. Develop skill-based multipliers based on Step 8. Determine the employee base bonusskill set, importance of position to farming opera- by multiplying the equivalent of wages for onetion, supervisory status, and consequence of person day by the composite scoreleaving (e.g., field worker = 1, lead = 2, foreman = 3)Step 5. Conduct performance evaluations Step 9. Calculate final bonus amount by(supervisor, self-evaluation, or peer-evaluation) multiplying base bonus by skill-based multiplierExample of a Multi-Factor Bonus System Employee & Calculations Employee A Employee A Employee B Employee B Calculations Calculations Performance Evaluation Supervisor 1 4.5 4 Supervisor 2 5 3.75 Co-Worker 1 4.25 4.75 Total Performance (4.5 +5 + 4.25) (4+ 3.75 + 4.75) Evaluation Score 13.75 = 13.75 12.5 = 12.5 Average Performance 13.75/3 12.5/3 Evaluation Score = 4.6 = 4.2 Personnel File Demerit1 no call = late 3 times 0.25 x 1 0.25 = 0.05 x 3 0.15 Composite Score 4.6 – 0.25 4.2 – 0.15 = 4.35 = 4.05 Bonus Base (Wages) $90 per day $90 x 4.35 $150 per day $150 x 4.05 ($9/hr for 10 hrs) = $391.50 ($15/hr for 10 hrs) = $607.50 Skill-Based Multiplier Field worker = 1 1 Foreman = 3 3 Final Bonus $391.50 x 1 $607.50 x 3 = $391.50 = $1,822.50 1 It is important to standardize the points for each type of demerit ahead of time to maintain consistency, equity and clearly defined expectations.Page 18 ATTRA Beyond Basic Compensation
  19. 19. ResourcesFarm LaborAg Help Wanted: Guidelines for ManagingAgricultural LaborBy H.P. Rosenberg et al. 2002www.aghelpwanted.orgUniversity of CaliforniaAgricultural Labor ManagementBy Gregorio to Stabilize Your Workforce and Increase Profits,Productivity and Personal SatisfactionBy Suzanne Vaupel et al. 1995 General Human Resources ERI Economic Research InstituteFarm Employers Labor Service (FELS) Distance Learning CenterWage and Benefits Surveys Chapter 18 Incentive Pay Manager Info World at WorkKansas State University Sarah Employee Stock Ownership Plans National Center for Employee Ownership (NCEO)Agricultural Economics & Agribusiness Management www.nceo.orgMichigan State UniversityBy Vera Bitsch The ESOP www.esopassociation.orgCIRS Research Tax ReferencesPositive Practices in Farm Labor Management: IRS Farmer’s Tax GuideKeeping Your Employees Happy and Your Production Publication 225Profitable Institute for Rural DOL Frequently Asked Questions about Pension Plans and ERISABest Labor Practices on Twelve California Farms: a More Sustainable Food SystemBy Ron Strochlic and Kari Hamerschlag 2006 IRS Guide on Profit,,id=108948,00.htmlFarm Labor Conditions on Organic Farms in CaliforniaBy Strochlic, et al. 2008 Incentive Pay ConsultingCalifornia Institute for Rural Studies Ownership ATTRA Page 19
  20. 20. Another handbook produced by California Institutefor Rural Studies and National Center for Beyond Basic Compensation:Appropriate Technology Using Bonuses, Profit Sharing,Positive Practices in Farm Labor Management by and Employee Ownership to MotivateErin Hardie and NCAT staff, 2008. This user-friendly and Retain Workers on Your Farmhandbook provides growers with information about how RME-D7402565to implement a range of positive farm labor practices. Produced by California Institute for Rural Studies andIncluded are specific strategies to improve employee sat- National Center for Appropriate Technologyisfaction and retention, and increase productivity while © 2010 CIRSreducing costs. The practices will improve access to mar-kets seeking products from farms with fair labor prac- Lisa Kresge, Editortices. Based on findings from earlier CIRS research on Karen Van Epen, Productionsustainable farms with positive farm labor conditions. IP 360Available to download from CIRS or ATTRA. Slot 360 Version 032210Some of the other publications available from This publication is available on the ATTRA website:California Institute for Rural Studies www.attra.ncat.orgBest Labor Practices on 12 California Farms: Toward To download it for free, go to:a More Sustainable Food System by Ron Strochlic and Hammerschlag, 2006. Based on case study researchon 12 California farms with a reputation for positive work- To access it online, go to: conditions, this report features a broad range of posi-tive workplace practices that result in a more satisfied andmotivated workforce, and numerous benefits for grow- California Institute for Rural Studies is a nonprofiters, including increased retention, reduced training and research organization that works toward a rural Californiasupervision costs, and increased revenues. The research that is socially just, economically balanced, and environ-also identifies workplace conditions that farmworkers most mentally sustainable. In keeping with a public-servicevalue, including many that are no- or low-cost, yet greatly approach to research, CIRS disseminates its research find-contribute to satisfaction and motivation. ings to policy makers, stakeholder organizations, and the general public.California Water Stewards: Innovative On-Farm California Institute for Rural StudiesWater Management Practices by Lisa Kresge and Katy 221 G Street, Suite 204Mamen, 2009. The case study findings provide informa- Davis, CA 95616tion for growers interested in implementing more sus- 530-756-6555tainable water practices. www.cirsinc.orgWater Stewardship: Ensuring a Secure Future forCalifornia Agriculture by the California Agricultural The National Center for Appropriate Technology is aWater Stewardship Initiative workgroup, 2008. The private nonprofit organization that since 1976 has helpedreport calls for producers and policy-makers to recog- people by championing small-scale, local and sustainablenize the importance of agricultural water stewardship as solutions to reduce poverty, promote healthy communi-a key element of a strategy to better manage the state’s ties, and protect natural resources. ATTRA—the Nationaldwindling water resources and reduce farmers’ reliance Sustainable Agriculture Information Service—is a projecton insecure inputs. Please visit of NCAT, funded through the USDA Rural Business-Coop-for more information on this initiative. erative Service.Breaking Down Market Barriers for Small and Mid- ATTRA / NCAT California Officesized Organic Growers by Alida Cantor and Ron Stro- PO Box 2218chlic, 2009. Based on interviews and surveys with grow- Davis, CA 95617ers, buyers and others, the findings provide a detailed 530-792-7338; 1-800-346-9140picture of key marketing challenges with recommenda- www.attra.ncat.orgtions for improving marketing opportunities.Page 20 ATTRA